self directed IRA to invest in real estate

[Carol Bahou]

hi everyone, does anyone have actual real experience in investing in real estate through self directed IRAs?

[Matt Devincenzo]

I do...bought two (I think) in partnership, sold one cash, sold another on a note. I've since bought five notes, and two private stock offerings.

My parents have bought maybe five properties over the years in their SD IRA. They also sold them on a mix of traditional sale and held notes on some.

[Dmitriy Fomichenko]

Quote from @Carol Bahou:

hi everyone, does anyone have actual real experience in investing in real estate through self directed IRAs?

Yes, I own rentals in my retirement account and also hundreds of my clients. How can I help?

[Daniel Dietz]

My partners and I own an LLC made up of all 3 of our SDIRAs and another made up of our SOLO401Ks (great if you qualify).

Some people say that is not the 'fastest way' to gain wealth in RE is to highly leverage and go big. With the Self Directed accounts your leverage IS more limited, but ALSO your risk is reduced due to that lower leverage and non-recourse type of loans.

In our case we all ALREADY had all of our retirement savings in IRAs and 401Ks, so it seemed natural.

Feel free to reach out if you have any questions.

Dan Dietz

[Carol Bahou]

i have questions!! :)

[Carol Bahou]

Quote from @Matt Devincenzo:

I do...bought two (I think) in partnership, sold one cash, sold another on a note. I've since bought five notes, and two private stock offerings.

My parents have bought maybe five properties over the years in their SD IRA. They also sold them on a mix of traditional sale and held notes on some.

 Thanks so much.  Is it easy?  If I have only 20k in the SDIRA, can I use that as a downpayment and then carry a note in the SDIRA name?

[Matt Devincenzo]

I wouldn't say it is easy or hard, it's a different way to buy real estate for investment. If you have no other experience I'd say you should NOT pursue this for now because it will be hard. The biggest reason is because it is a retirement account, your options to fix problems are more limited. So if you don't already know about buying real estate then you're trying to learn while using an account with additional rules you need to follow.

You can buy with 'non-recourse financing' but the DP and interest are higher, so you need to understand and account for that in planning your purchase. Personally I don't think an SDIRA is a good idea until you have maybe $50k. My first years I had a lot of uninvested funds because there wasn't enough in the account to buy anything until I could make more contributions. That was why I had to do partnerships, but that means you need to find partners to work with, which is another learning curve too. Had those funds been in a traditional brokerage I'd have gotten some return on them. So I'd keep a traditional account until you have $40-50K to work with.

[Carol Bahou]

Quote from @Matt Devincenzo:

I wouldn't say it is easy or hard, it's a different way to buy real estate for investment. If you have no other experience I'd say you should NOT pursue this for now because it will be hard. The biggest reason is because it is a retirement account, your options to fix problems are more limited. So if you don't already know about buying real estate then you're trying to learn while using an account with additional rules you need to follow.

You can buy with 'non-recourse financing' but the DP and interest are higher, so you need to understand and account for that in planning your purchase. Personally I don't think an SDIRA is a good idea until you have maybe $50k. My first years I had a lot of uninvested funds because there wasn't enough in the account to buy anything until I could make more contributions. That was why I had to do partnerships, but that means you need to find partners to work with, which is another learning curve too. Had those funds been in a traditional brokerage I'd have gotten some return on them. So I'd keep a traditional account until you have $40-50K to work with.

Thanks! My husband has 100k in a sep IRA that we could convert. But my question is lets say we convert to SDIRA and then we take 80k of that to be a DP into a rental, that is ok to do right? the rental then holds the mortgage - is that how it works?

[Matt Devincenzo]

Correct, think of the IRA as a separate person. Everything you do as the IRA 'person' needs to be paid for by it and handled through it. So the mortgage will be in the IRA's 'name'. Lookup UDFI (unrelated debt financed income) as well as non-recourse loans as both will come into play.

[Dmitriy Fomichenko]

When buying real estate in an IRA you are not allowed to provide personal guarantee therefore the loan must be non-recourse. Here is a list of lenders offering such product:

https://www.biggerpockets.com/...

[Bill B.]

Don’t forget, if any additional money is required to make a payment because of a vacancy or a squatter, or a tenant refuses to pay or leave. Or to pay for a repair, you can’t provide it, you can’t borrow it, etc etc. You can’t do repairs, you can’t stay there, any violations will be the same as a 100% taxable withdraw. So make sure you have massive reserves. 

This is an alternative for people who don’t have non-retirement funds to invest. Same story when you reach retirement age and have to withdraw the funds. You’ll be forced to lo the property to start taking minimum withdrawls if you don’t have enough cash in the account. Please be careful. 

[Wesley I.]

Before pulling the trigger on this, read up on prohibited transactions.

[Carol Bahou]

Quote from @Bill B.:

Don’t forget, if any additional money is required to make a payment because of a vacancy or a squatter, or a tenant refuses to pay or leave. Or to pay for a repair, you can’t provide it, you can’t borrow it, etc etc. You can’t do repairs, you can’t stay there, any violations will be the same as a 100% taxable withdraw. So make sure you have massive reserves. 

This is an alternative for people who don’t have non-retirement funds to invest. Same story when you reach retirement age and have to withdraw the funds. You’ll be forced to lo the property to start taking minimum withdrawls if you don’t have enough cash in the account. Please be careful. 

Thanks for your comments!  Do you mean if there are any additional payments needed - repairs or need to pay for vacancies, it has to come out of the SDIRA account right?  so keep a reserve amount inside of the SDIRA, don't use all of the 100k (that I have right now in the SDIRA) for the downpayment - is that what you mean?

[Bill B.]

@Carol Bahou

Yes. Exactly. You can't pay the plumber or the ac replacement bill< or anything otu of your pocket. You need a plan for a $10k AC repair bill. Or a tenant that doesn't pay for 3 months while you try to evict them. Or god forbid 3 years like Oakland is still suffering under. Anyone there that used an IRA could easily have lost their entire retirement fund.

[Carol Bahou]

Quote from @Bill B.:

@Carol Bahou

Yes. Exactly. You can't pay the plumber or the ac replacement bill< or anything otu of your pocket. You need a plan for a $10k AC repair bill. Or a tenant that doesn't pay for 3 months while you try to evict them. Or god forbid 3 years like Oakland is still suffering under. Anyone there that used an IRA could easily have lost their entire retirement fund.

 So i would do a checkbook account register right? So i can pay the bills, write checks out of the SDIRA..

[Bill B.]

Yes. But my point is you can’t invest all or even most of the money in your account. 

You say you only have $20k in your account. What if you used $10k as the downpayment and then needed $12k for a AC repair? Or just used $15k as a downpayment and then had to make a couple months of payments to make the property ready, pay for inspections and repairs, commissions, utilities, advertising, and then it sat empty for a month and you had to make another payment?

[Carol Bahou]

Quote from @Bill B.:

Yes. But my point is you can’t invest all or even most of the money in your account. 

You say you only have $20k in your account. What if you used $10k as the downpayment and then needed $12k for a AC repair? Or just used $15k as a downpayment and then had to make a couple months of payments to make the property ready, pay for inspections and repairs, commissions, utilities, advertising, and then it sat empty for a month and you had to make another payment?

 I see your point.  I can always make deposits/contributions into the SDIRA though.

[John Chenoweth]

Quote from @Carol Bahou:

Quote from @Bill B.:

Yes. But my point is you can’t invest all or even most of the money in your account. 

You say you only have $20k in your account. What if you used $10k as the downpayment and then needed $12k for a AC repair? Or just used $15k as a downpayment and then had to make a couple months of payments to make the property ready, pay for inspections and repairs, commissions, utilities, advertising, and then it sat empty for a month and you had to make another payment?

 I see your point.  I can always make deposits/contributions into the SDIRA though.

I would like to purchase a property in Costa Rica and put it in Airbnb. Is that an option?

What if I rented my own property through Airbnb and any income I received for that stay went right back to the Ira is that considered a disqualified transaction?

[Brett Synicky]

@John Chenoweth

Yes you’re a disqualified person as is your spouse, your parents, your children and their spouses.   None of you can personally benefit from something the SDIRA owns. 

Doing this would likely render your SDIRA invalid and could cause all kinds of trouble like taxation/penalties etc.   

[Taylor Black]

One alternative investment that has no additional cost after your investment is mineral rights. I have been invested in oil and gas mineral rights making double digit returns hassle free. No holding cost, no tenants, no insurance, no leaking toilets. Just straight income paid monthly. 

[Aaron Fillio]

Quote from @Taylor Black:

One alternative investment that has no additional cost after your investment is mineral rights. I have been invested in oil and gas mineral rights making double digit returns hassle free. No holding cost, no tenants, no insurance, no leaking toilets. Just straight income paid monthly. 

 How do you go about doing this? Is this something your custodian offers?